Global Tax Negotiations Stumble

International negotiations on new tax rules for the digital age will fail to conclude this year, raising the risk of a trans-Atlantic trade conflict and a proliferation of contentious national levies on global tech giants.

The Covid-19 pandemic and disagreements between the European Union (EU) and President Donald Trump’s administration have hobbled years-long talks between more than 130 countries at the Organization for Economic Cooperation and Development (OECD).

Negotiators will present blueprints for a tax overhaul to a Group of 20 meeting later this week, marking progress on many technical issues but falling short on key elements such as what type of business activity will be included in the scope of new rules. The OECD now aims to conclude the process by mid-2021.

“We could call it a half-empty or half-full glass; it depends on the way you look at it,” said Pascal Saint-Amans, director of the center for tax policy at the Paris-based OECD. “It’s a good wine, it’s good stuff, whether half empty or half full.”

The delay may strain the fragile truce in a trade dispute sparked by the issue of digital taxation. The United States is readying tariffs against countries that are considering or already adopted blunt levies on revenues of multinational tech firms without waiting for the conclusion of the OECD talks on rules for taxing profits. The U.S. says digital services taxes, or DSTs, unfairly target its companies, including Alphabet Inc.’s Google and Facebook Inc.

The Trump administration has launched so-called “301 investigations” into several European countries, including the U.K., and also Brazil, India, and Indonesia. This is the same tool used to justify tariffs on Chinese goods for alleged theft of intellectual property.

The probe into France’s DST has already concluded with the U.S. announcing 25 percent tariffs on $1.3 billion of French goods, such as makeup, soap, and handbags. But those levies were delayed until early January after France suspended the collection of its DST until the end of 2020. Both sides have said their concessions sought to give the OECD talks time to conclude.

In a worst-case scenario, a failure to agree on new rules—and trade disputes over multiple DSTs—could reduce global GDP by more than 1 percent annually, the OECD estimated.

“It is imperative that we take this work across the finish line. Failure would risk tax wars turning into trade wars at a time when the global economy is already suffering enormously,” OECD Secretary-General Angel Gurria said.

Aside from the trade repercussions, there are high financial stakes in the negotiations, which also include a chapter on creating a global minimum tax. According to an impact study released by the OECD, the combined overhauls would boost tax revenues by between $60 billion to $100 billion, or 4 percent of global corporate income tax. New rules on tax in the digital era could reallocate taxing rights on around $100 billion of the profits of multinational firms, the same study says.

The OECD expects heightened pressure to find a solution, as governments will seek to repair their finances after massive spending during the Covid pandemic and voters will increasingly demand tech firms pay their “fair share.”

Unresolved issues include the scope of new tax rules, the amount of profit to be reallocated, the degree to which a new system would be mandatory, and how to ensure and enforce tax certainty, the OECD said.

Saint-Amans said an agreement on scope would have a “domino effect” that could unlock the other issues. But scope is one of the main political disputes, with the EU initially pushing to ring-fence digital firms, while the U.S. called for a broader target, including consumer-facing companies.

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